US Insights

Amazon earnings highlight need for speed

Harriet Leach

Senior Analyst

Retail 08.01.2019 / 09:00

Amazon

One-day delivery can be expected to ramp up in key international markets like the UK, Germany and Japan.

Amazon delivered a mixed earnings report last Thursday. The eCommerce giant announced worldwide sales gains of 20% to $63.4 billion, but profits failed to meet prior H1 expectations.

International retail net sales saw a +12% YoY change, indicating that investments in Brazil, Singapore and the UAE, among others, are generating growth for the division. Operating losses also remained fairly flat versus the previous year.

Here are some of the highlights from the earnings reports from Amazon in Q2 2019.

Prime Day “the best yet”, with a more global-centric approach

With the Q2 period ending 30 June 2019, Prime Day numbers were not a factor in this set of numbers. However, that didn’t stop Amazon putting it front and centre in its results release and call.

AMZNEarnings1

This was the main event of the year so far, with the company reporting that the annual promotion generated the largest amount of sales ever made predominantly through Amazon devices. It also saw more Prime membership sign-ups globally than any previous event.

Prime Day witnessed several unified global marketing executions, making the day more joined up across international markets than ever before. There was a keen focus on celebrity product launches, retail entertainment with the Prime concert and an emphasis on the ‘global store’ in more nuanced markets.

Spending big where it matters

This quarter Amazon reported that marketing expenses were up a phenomenal 48% YoY. Much of this, it seems, was due to Prime Day, with ad spend for this year’s event estimated to be up 25% to around $40 million, according to several media analytics agencies.

There was also significant investment in Amazon Web Services, but also in Amazon Advertising and Prime Video. These now are core elements of the business model and all areas in which Amazon needs to spend to compete with high-profile rivals - Microsoft, Google, Alibaba on Cloud services; Google on online advertising, and Netflix in video.

In the case of AWS, the investment paid off, with 37% sales growth to $8.4 billion. Even so, that figure was the first time growth came in under 40% since AWS numbers were broken out in the quarterly results. This dip however, is unlikely to concern Amazon just yet.

Subscription services also gained 37% to $4.7 billion, showing the real need for brands to engage with these unique tools  to leverage growth opportunities across the Amazon ecosystem. The subscription division includes Prime Video, which is a key generator of stickiness with Prime. Amazon is developing more touchpoints through retail entertainment and is expected to be a priority moving forwards.

Ultra-convenience underpins future facing fulfilment strategy

One-day delivery is growing fast in North America and can be expected to ramp up over the next few quarters in key International markets like the UK, Germany and Japan. However, improved delivery speed comes at a cost to profit and revenue in the US, but arguably has more traction in European markets. Cities such as London and Berlin, for example, already see a phenomenal number of products covered under 24-hour delivery.

Amazon reported Q2 shipping costs of $8 billion (+36% YoY), far higher than expected. For context, the previous three quarters saw shipping costs never growing higher than 23% YoY. It believes the service is worth the investment – over $800 million in Q2 alone - as it seeks to strengthen its position within shopper purchase decisions and drive sustainability improvements.

AMZNEarnings2

Shipment Zero is the key initiative Amazon is backing as part of its vision to make all shipments net zero carbon. One-day fulfilment has had a pronounced impact on shopper behaviours, with more categories and products entering consideration sets with the addition of faster delivery. For international markets, this will be a key mechanism to consider in the next half of 2019.  

In India, for example, Amazon is endeavouring to be faster still, introducing Flex, a scheme where local partners can directly deliver packages, building fulfilment capacity for smaller sellers and truly making ultra-speed part of the proposition.

We know that at home and abroad, Amazon’s grocery strategy is being ramped up, as building baskets and gaining frequency of shop becomes pivotal to its success or otherwise. Expect to see One-Day, Prime Now and more specialised and localised delivery services being built out across new markets and regions.

Prime Membership is still growing despite price increases

Membership overall continues to grow, with events like Prime Day a key driver. This quarter specifically, Prime was launched in new markets, including in the UAE. Indian Prime membership was reported as doubling in the last 12 months, showing that despite various regulatory changes at the beginning of the year, its shopper base among the country’s growing middle class isn’t perturbed.

Kantar’s Point of View

  • Prime membership remains essential for international growth, especially in India and new markets such as the UAE, Brazil and Australia, while Prime Now is being aggressively marketed in Singapore. While initial volumes in these markets will not match mature Amazon markets, brands should consider the target shoppers in each country on a market-by-market basis (e.g. UAE Prime members vs. Brazilian Prime members), and seek to tailor their offer accordingly.
  • Fulfilment will likely escalate even faster, with new delivery models emerging in developing markets to compete with the numerous on-demand intermediaries that are growing in size and influence in markets as diverse as France and India. Amazon’s interest in OOH delivery company Deliveroo shows it is aware of these companies’ importance. With rapid large-scale fulfilment likely to become integral to Amazon growth, consideration must be given to how products fare across various fulfilment methods and in different regions.
  • Key categories such as grocery and fashion remain a high priority, with new ways to find products through visual search and the launch of StyleSnap likely to grow apparel. The AI-powered feature launched to specifically grow fashion categories, directly competes with the likes of Google and Pinterest, and could also be a potential enabler for other adjacent categories such as homeware and health and beauty products. Finally, Amazon Advertising is seeing heavy investment, as Amazon promotes video content and new opportunities for brands to develop their content and placements and create more ‘stickiness’ for shoppers within the Prime ecosystem.

Source: Kantar

Editor's Notes

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